In absolute terms, oil production is vastly more expensive than it was in the 20th century – 2 to 2.5 times more expensive, so when we talk about lowering production costs today those costs are still higher than they were thirty years ago.
Tight oil production is as expensive as conventional oil production
When bottom fell out of the oil market in 2015 the entire industry was essentially devalued and the cost of everything (supplies, parts, services) is now half of what it was
90% of all the excitement about costs for producing tight oil coming down is actually from a depression in the oil industry and maybe about 10% can be attributed to new efficiencies
In 2017, when the price of oil began to rise the cost of drilling went up 10%
28:00 – Differences amongst tight-oil regions
Bakken region is particularly unusual because it is so far from infrastructure and building pipelines has resulted in long-drawn-out disputes
Because of the remoteness of the region the costs about $5.50 to $6.00 higher per barrel
Price tight oil companies get at the wellhead is less than the benchmark prices. Oil companies never make as much money as the benchmark and it varies by region
A barrel of oil isn’t just a barrel of oil
Oil quality varies tremendously across the world – measured by the inverse of specific gravity
System developed by the American Petroleum Institute (API) and uses the reciprocal of specific gravity – the lower the API the denser the oil is.
Average refinery in the United States is designed for 30 degrees API but oil produced from shale oil averages 50 degrees API – it is twice as light.
Lighter oil requires less refining but US refineries aren’t designed for it and need to blend it with other oil. For years the ultra-light oil was stacked up in storage tanks – one reason why there was so much in U.S. storage and U.S. WTI oil was sold at a discount because the refineries in the U.S. are designed for heavier oil.
Redesigning refineries is necessary, but export of U.S. oil has increased in the last few months – reached 2 million bpd at one point, but the U.S. oil is being sold at a discount. Now exports are coming down – 1.1. to 1.2 million bpd but the difference in prices is still there. Indicates that perhaps the global market is saturated with light oil.
37:00 – Role of data collection
EIA is the best source of information on energy in the world and great people work there but we always get predictions wrong. Run in trouble when forecasting by looking at trends and making assumptions based on trends.
Particularly important to look at producability of reservoirs
Reservoirs in the Permian basin – based on information reported by companies to the SEC – the top producers there say the Permian basin has about 3.8 billion barrels which is not nearly as much as they are saying the Eagle Ford and Bakken have – about 5 billion barrels each.
Proceed with caution when looking at forecasts, especially those that forecast production rates far out – reserves are moving targets and can change.
Approach with skepticism anyone’s predictions who say we can cut off all foreign oil supplies. There is a danger in making foreign policy assumptions based on these forecasts.
42:00 – Finances
Supply of oil in this moment in time is more related to capital (money) than any other factor
If investors keep shoveling money into tight oil it will continue to produce
If investors don’t, the companies won’t be fine. Fewer than 5 companies (maybe 1 or 2) that aren’t major companies that can pay for their operations with cash flow. 70-80% of companies spend at least as much as they earn on operations. None would be viable on their own.
Will these companies diversify? Only if they can attract investors. Very few are vertically integrated and few do anything but drill and sell. They are captive to oil prices.
Not a traditional model in the oil industry – traditionally based on value coming from taking raw material and turning into something that people want to buy.
Endgame of many of these companies from the beginning to was make money and sell the company – many were not in it for the long hall when they started. Different model from companies like Total and Chevron.
50:00 Sources of cash – will they dry up?
Financial collapse in 2007/2008 created near zero interest rates which essentially created the tight oil industry. Investors flocked to the tight oil industry because of rates the companies were willing to offer on junk bonds and preferred stock. 6-7% margin.
If interest rates go up – could see some taking their money out of tight oil and putting into safer avenues. The wave of investment was driven by necessity.
Arthur E. Berman is a geological consultant with thirty-seven years of experience in petroleum exploration and production. He currently is consulting for several E&P companies and capital groups in the energy sector. He frequently gives keynote addresses for investment conferences, boards of directors and professional societies. He is often interviewed about energy topics on television, radio, and national print and web publications including CNBC, CNN, CBC, BNN, OilPrice.com, Bloomberg, Platt’s, Financial Times, and New York Times.He is a Director of ASPO-USA (Association for the Study of Peak Oil & Gas USA). He was a Managing Director and frequent contributor at The Oil Drum, and is an associate editor of the AAPG (American Association of Petroleum Geologists) Bulletin. He was past Editor of the Houston Geological Society Bulletin (2004-2005) and past Vice-President of the Society (2008-2009).He has published more than 100 articles on geology, technology, and the petroleum industry during the past 5 years. Publication topics include petroleum exploration, oil and gas price trends and cycles, petroleum play evaluation, sequence stratigraphy, coastal subsidence, earthquakes, tsunamis, and petroleum geopolitics. He has published more than 20 articles and reports on shale gas plays including the Barnett, Haynesville, Fayetteville, Marcellus, Bakken and Eagle Ford shales.During the past four years, he has made more than 50 presentations to energy sector boards of directors and executive committees, financial analyst conferences, oil & gas association meetings, and engineering and geological society meetings. He worked 20 years from Amoco Corporation (now BP p.l.c.) and has been an independent consulting geologist for 17 years.He has an M.S. (Geology) from the Colorado School of Mines and a B.A. (History) from Amherst College.